Why investors scramble over T-bills despite yields approaching zero
You probably may have heard that investors are still rushing Treasury bills ( T-bills) despite yields on the short-term instrument reaching near zero, and you keep wondering “why would a person, in his right thinking frame, put his money into an investment with almost no returns”.
Well, you are not wrong for thinking that way.
Yields on T-bills, which simply mean the returns a person gets for investing in the asset, averaged as low as 0.1 percent, based on data drawn from the last Treasury bills auction conducted, Wednesday 25th, November, by the Central Bank of Nigeria (CBN).
The yields are described as low considering what it was some three years ago. At that time, investors could get as much as 14 percent for investing in the instrument.
Given the above, when one considers the spread between what it is today (0.1 percent) and what it was then (14 percent), it is somewhat logical to say the returns on the asset is nothing.
But that is not even the shocker. The shocking news is the fact that despite the significantly low yield, investors keep “falling on one another” just so they can get some of it.
In the last auction, investors were unbothered about the low returns, subscribing a total of N445.9 billion worth of T-bills, about three times the N167.8 in which the apex bank had planned to offer.
In essence, investors over
subscribed the instrument to the extent that more than N295 billion worth of unsuccessful bids was recorded.
That wasn’t the first time; it has been the trend for long, with investors ignoring the low-interest rate on T-bills to oversubscribe for the asset.
What then is driving investors to behave this “irrational”? To understand this, it is pertinent one knows better what T-bills are; how it works vis-à-vis the Nigerian market.
What are Treasury Bills?
Treasury bills are shortterm instrument used to raise money. They are mostly issued once in every two weeks, by the CBN on behalf of the Federal Government. Buyers of the instruments are requested to quote bids (offer a certain price) following which the average minimum bid is selected.
By short-term, we mean
the instrument last for one year or less, and the return is fixed. By this we mean that the return on the asset remains unchanged throughout the period no matter what the economic headwind is.
Why do investors oversubscribe Nigerian T-bills despite almost zero returns?
Risk-free: The risk-free nature of treasury bills makes it a haven for investors looking for returns in an economy that is faced with a mirage of challenges, including political, economic and social.
One of these challenges that is pronounced stems from the fact that the country relies on oil for over 80 percent of its dollar earnings to boost reserve, and over 70 percent of the government’s revenue. Thus, whenever there is a disruption in the oil sector, the country’s macroeconomic fundamentals are badly af
fected.
The two times Nigeria slipped into a recession, it was largely because of disruptions in either the oil price or production, or both.
Since oil is Nigeria’s biggest revenue and foreign exchange earner, disruptions in the oil sector are known to put pressure on the naira which might result in devaluation.
Investors know and perceive this as the biggest challenge for Nigeria, as such, they tend to stake their money in risk-free assets, which is what T-bills are known for. They do this as opposed to investing in assets that are susceptible to macroeconomic headwinds.
With that, they are sure to get a fixed return on their assets no matter the direction of the economy, whether it is good or bad.
Short-term: As noted earlier, T-bills are debt-based financial instruments that last for one year or less.
In a country like Nigeria, whose economy is known to be engulfed in severe economic challenges, it would be rational for investors to put their money in a short-term instrument, at least they can better predict the situation/ direction of things in the short run than the long run.
A lack of alternative asset classes: By alternative asset classes, we mean other options available to investors to invest their monies in.
As it stands today, there are no much investible instruments that investors can invest in. In Nigeria, aside from bonds, stocks, real estate, and commodities (gold, oil, etc), there are not many options available for investors, as opposed to what is seen in other climes.
Of all the aforementioned instruments, virtually all are long term and are susceptible to the uncertain terrain of the Nigerian economy.
Negative real interest rate: By real interest rate, we mean the return on assets after adjusting for inflation.
It is calculated by subtracting the returns on an asset from the prevailing inflation.
Inflation which measures price changes quickened to 14.23 percent in October, the highest in 32 months, according to NBS data.
With that, yields on assets went further negative, meaning that the gains from investing in assets are largely not available.
Although real interest rates on T-bills are negative however, some investors would prefer investing in an asset with a negative real interest rate with returns that are short term in nature, than negative real assets with returns that are long term in nature.
For there to be increased investors sentiments in an asset, returns must be higher than the current inflation rate. Little wonder why there has been increased interest in equities following declining yields in fixed income space.
The equities market has gained over 29 percent this year as the ample liquidity from the fixed income market finds its way into some fundamentally strong stocks.
However, some investors still prefer their portfolios being exposed to risk-free assets like T-bills as opposed to letting it exposed to a more risky asset like equities given the fragile state of the economy.
How did interest rates on T-bills fell to the point of reaching near-zero?
In October 2019, the CBN in a bid to boost lending to the real sector of the economy and spur growth came up with a policy restricting non-bank domestic investors from investing in its OMO bills.
The policy then sparked excess liquidity in the fixed income space, such that the monies from maturing OMO bills by domestic institutional investors could not be rolled over but invested in bonds and T-bills.
Since then yields on both asset classes came crashing to the point of near zero. With the falling spree in yields, it might get to the point of negative yield. Who knows?
If that happens, it means investors are paying the government to keep their own money.